October 17, 2010

Jack Kelly Sunday

While the headline for Jack's column this week may turn out to be true, little else is.

Let's jump right in:

The member of Congress most responsible for our current economic troubles may pay for his sins in November.

Rep. Barney Frank, D-Mass, is chairman of the House Financial Services Committee. No one insisted more strongly on the lax lending standards at the heart of the subprime mortgage crisis. No one fought more vigorously against oversight of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), whose bankruptcies accelerated the economic collapse.

"The issue that day in 2003 was whether mortgage backers Fannie Mae and Freddie Mac were fiscally strong," wrote Donovan Slack of the Boston Globe Thursday. "Frank declared with his trademark confidence that they were, accusing critics and regulators of exaggerating threats to Fannie's and Freddie's financial integrity ... Now, it's clear he was wrong."

So much Jack-spin in such a small Jack-graf. This is such an old chestnut that Frank has already responded to it. In March of 2009:

[T]he Republican history on this subject appears to end in 2003. I understand why they find later events unpleasant, since those events document the gathering series of policy mistakes that the Republicans made which ended in their being repudiated in 2006, and re-repudiated in 2008. In their view of the world, the last relevant thing that happened was a statement I made in 2003 in which I said that Fannie Mae and Freddie Mac were not in crisis. I did say that. And I would have said it as well – and may have – about Wachovia Bank, Lehman Brothers, Bear Stearns, the Royal Bank of Scotland, and dozens of other financial institutions in America and elsewhere which were not in fact in crisis in 2003. [emphasis added]

He went on:

What happened subsequently, in the years the Republicans wish to ignore because they cannot defend what happened – is that the Bush administration pushed for even more subprime lending, Alan Greenspan refused to use congressional authority he’d been given in 1994 to regulate it, and the House Republicans blocked any efforts to legislate against it. In fact, as quoted in a story in the Bloomberg News, when the Bush administration ordered Fannie Mae and Freddie Mac to increase significantly the number of loans they bought for people below median income, I objected saying that this would be good neither for the borrowers who could not repay the loans nor for Fannie Mae and Freddie Mac.

Incidentally, Donovan Slack of the Globe (who Jack quotes) while heaping lots of blame on Congressman Frank also wrote:

But Frank said that putting blame entirely on him is unfair — and several independent analysts agree. They said Republicans also failed to take warning signs seriously enough to avert disaster, despite controlling the White House and both houses of Congress between 2003 and 2007, a crucial period leading up to the Fannie and Freddie failures.

Something of Slack's that Jack didn't quote. Same with this:

When the Democrats won control of the House in 2006 and Frank became chairman of the Financial Services Committee the following year, one of the first measures he helped pass imposed tougher regulations on Fannie and Freddie and prevented them from taking on too much risk.

“It’s the Republican line. They say it happened on my watch, but my watch began in January 2007,’’ Frank said. “The mistake I made was a nonoperational one — I wasn’t in power. From the day I became chairman, I think we did everything we could.’’

By the time Frank’s bill passed, it was too late.

Indeed for not fighting vigorously against oversight of the Fannie Mae and Freddie Mac, this is an odd charge considering that Frank sponsored the Federal Housing Finance Reform Act of 2007 which, according to the CRS summary:

Amends the Housing and Community Development Act of 1992 (Act) to establish, in place of the present Office of Federal Housing Enterprise Oversight, a Federal Housing Finance Agency (FHFA), headed by a Director (Director) possessing general supervisory and regulatory authority over the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the federal home loan banks ("the regulated entities").

Jack, like some other conservative critics, conspicuously ends his history of the lending crisis at the punctuation ending Barney Frank's 2003 statement while his chairmanship of the Committee started 4 years later.

In any event, the whole "Fannie Mae/Freddie Mac created the crisis" is more or less bunk.

There’s a dangerous — and misleading — argument making the rounds about the causes of our current credit crisis. It’s emanating from Washington where politicians are engaging in the usual blame game but this time the stakes are so high that we can’t afford to fall victim to political doublespeak. In this fact-free zone, government sponsored mortgage giants Fannie Mae and Freddie Mac caused the real estate bubble and subprime meltdown. It’s completely false. Fannie Mae and Freddie Mac were victims of the credit crisis, not culprits.

Start with the most basic fact of all: virtually none of the $1.5 trillion of cratering subprime mortgages were backed by Fannie or Freddie. That’s right — most subprime mortgages did not meet Fannie or Freddie’s strict lending standards. All those no money down, no interest for a year, low teaser rate loans? All the loans made without checking a borrower’s income or employment history? All made in the private sector, without any support from Fannie and Freddie.

Look at the numbers. While the credit bubble was peaking from 2003 to 2006, the amount of loans originated by Fannie and Freddie dropped from $2.7 trillion to $1 trillion. Meanwhile, in the private sector, the amount of subprime loans originated jumped to $600 billion from $335 billion and Alt-A loans hit $400 billion from $85 billion in 2003. Fannie and Freddie, which wouldn’t accept crazy floating rate loans, which required income verification and minimum down payments, were left out of the insanity.

So Jack's arguments (that Fannie Mae/Freddie Mac is to blame and Barney Frank is responsible for that) are both old and incorrect.

8 comments:

Good research on the financial collapse. Especially good catch on the Business Week article.

I looked, and Frank's Federal Housing Finance Reform Act (of 2007) never became law. It languished in a Senate committee. Probably a Republican threatened a filibuster or personal hold.

I have heard other Republicans/conservatives claim Fannie/Freddie were the most important factor in the financial collapse in the last ten months. It is apparently a common theme. The fact that it doesn’t reflect reality only shows how Republicans are the opposite of committed to helping America recover from the recession that the Republicans caused.

Think I am being too hyperbolic? Consider that as of early October, the House had passed 420 some bills that the Senate has not yet passed. Republicans are using the Senate as a means of stopping much of the work of the government, and then simultaneously saying that Congress is out of control on spending and also has not done enough on jobs. According to the Republicans, Congress is both not active enough and too active, both at once. All that while they use the filibuster and personal holds to sabotage the country during the economic recovery. Forget going back to the Bush days, the Republicans right now should be branded as traitors.

"We urge you to reconsider your Administration’s criticisms of the housing-related government sponsored enterprises (the GSEs) and instead work with Congress to strengthen the mission and oversight of the GSEs. We write as members of the House of Representatives who continually press the GSEs to do more in affordable housing.

We have been concerned that the Administration’s legislative proposal regarding the GSEs would weaken affordable housing performance by the GSEs, by emphasizing only safety and soundness. While the GSEs’ affordable housing mission is not in any way incompatible with their safety and soundness, an exclusive focus on safety and soundness is likely to come, in practice, at the expense of affordable housing.

We also ask you to support our efforts to push the GSEs to do more affordable housing. Specifically, join us in advocating for more innovative loan products and programs for people who desire to buy manufactured housing, similar products to preserve as affordable and rehabilitate aging affordable housing, and more meaningful GSE affordable housing goals from HUD."

Ah, Rich, so no one is supposed to be looking out for people who buy mortgages, or buy securities funds? No one is supposed to make sure rules are followed?

Yes, there were lots of players in the financial collapse, but it was Congress that had cut regulations and it was the Bush administration that set an anti-regulatory tone. It is the government that is supposed to prevent or at least ameliorate these situations. And even when the Democrats took over Congress, the Republicans in the Senate blocked reform (as written by Barney Frank).

And Republican Senators are still blocking financial reform. But that’s OK, everybody’s to blame. And Republicans still single out Barney Frank and Fannie and Freddie as the entities most responsible for the financial collapse. And the Tea Party will demand less regulation and the gutting of federal agencies, because they are buying the lies of Republican politicians and conservative commenters.

Ed, I'm starting to question your intelligence.I suggested you read a book about the subprime mortgage scam, and you question whether i think people should have advocates!!??Your problem is you seem to only have a superficifal knowledge on a lot of things. Now go read the book and quit acting like a little ninny!!

Rich, I suggested the responsibility for looking out for the overall health of the economy should lie with the Congress (in terms of writing laws dealing with regulating banks and financial institutions behavior) and the regulators: the Fed, the SEC, Treasury and presumably some others. Congress in fact lessened the regulations in 1999 and did nothing to restore them during the Bush years.

I did not say people should have advocates (although I think they should, but that's not what I said). The banks, Moody's, financial ratings firms, investment houses, they all behaved in an unethical manner, but the government, which is responsible for preventing or at least stopping this behavior once it started, did not do so. In other words (again), I think the final level of blame lies with Congress and the regulatory arms of the government.

I also said somethings about Republicans, but I gather we are not discussing that.

I have what knowledge I have. But misrepresenting what I say ("advocates"?) does not make your case that my knowledge is superficial. I will accept the judgment of the other people who read these comments on that.

By the way, I have heard great things about "The Big Short". I had it out from the library a couple of months ago, but just couldn't get to it. Which was simply poor scheduling on my part.

"Ah, Rich, so no one is supposed to be looking out for people who buy mortgages, or buy securities funds?" Maybe I misunderstood what your were saying above. It seems to me that you are suggesting that someone act pro-actively on the behalf of buyers. Is calling them "advocates" that far fetched.

Repub's or Dems they all have responsibility. However, the "everyone should own a house" belief system comes from the Dems. Fannie Freddie are big players in the fraud game. Somewhere in the early part of the Big Short, the author makes the point that promoting mortgages had taken on somewhat of a moral agenda vs a financial one.In another book i recommend,Fool's Gold, about JP Morgan and their pioneering of credit default swaps, it states on page 39 and I paraphrase, that the Clinton administration and specially Sec'y of the Treasury, Lloyd Bentsen,were very supportive of derivatives and the Wall Street culture. The presence of Goldman Sachs alum, Robert Rubin, as Head of the Council of Economic Advisors solidified that belief.

The book goes on to say that the relationship of Wall Street with the White House didn't skip a beat during the transistion from GHWBush and Clinton!!So a D or an R, what difference does it make.